Preface to the Development Report of Europe 2010-2011

As commonly depicted as well as summarised by the Annual Development Report of Europe 2009-2010 the 2008-2009 financial crisis is just like a storm sweeping the world. However, I would rather now compare it to an earthquake, an eruption triggered by those deep-seated problems. In particular, due to the interwovenness of the relationships between the US and Europe, positioned within the same 'seismic zone', it is almost impossible for Europe to escape a disaster originating primarily in the US, the epicenter. Exactly as an earthquake, the world financial crisis has rippled rapidly throughout Europe, lain bear the weaknesses within European economic governance and the failures of its financial supervision, thus touching off a series of secondary disasters, such as the European debt crisis. Nowadays, the strongest waves of shocks have already died down although aftershocks still persist, and the Europeans have begun to re-construct their homes. Having experienced this extremely violent earthquake affecting the whole world, the issues with regard to the approaches that the Europeans are taking to rehabilitate their homelands and to further influence the world on this basis will undoubtedly arouse the most attention from us in this year's Report.

What are the tendencies in Europe most worthy of our concerns in this post-crisis era?

Firstly, efforts have been taken by the EU to eliminate the various potential dangers within its financial supervision system and strengthen economic governance, in order to provide a systematic guarantee for the future smooth development and its ability to prevent chances of events like this happening again.

To reinforce financial supervision and economic governance and stabilise the Euro, is not only an emergency measure to respond to the crisis, but the institutional construction and improvement of the supervision regime is also a strategic decision with an eye to the future.

It is demonstrated by the crisis that the European financial supervision model is obviously lagging behind the development of its financial market, which previously remained fragmented along the national lines and which led to the great failures in the surveillance towards the transnational financial activities due to lack of coordination. Therefore, a better and more effective regulation of the financial institutions within the EU has become an urgent issue calling for immediate solution. Under the request of the European Commission, a report on the EU's financial supervision was published in February 2009, composed by the High-Level Group chaired by Mr. Jacques de Larosière, former Managing Director of the IMF and former Governor of the French central bank, calling for expanding the scope of the EU's financial supervision, which later became the basis of the financial supervision package put forward by the European Commission. The framework and principles for EU financial supervision were fixed at the European Council meeting held in June 2009, and the European Commission was entrusted to draft the legislative documents. On June 19 2009 a package reforming the European financial supervision system was unveiled by the European Commission, then endorsed by the Economic and Financial Affairs Council (Ecofin) on September 7 2010 and given a final seal of approval by the European Parliament at its plenary session on September 22 2010.

The new European System of financial supervisors (ESFS) will be composed of one Board and three Authorities, namely, the European Systemic Risk Board (ESRB), responsible for the macro-prudential oversight of the financial stability across the European Union, including particularly controlling the overall credit level in the EU and preventing the emergence of bubbles, and a European Banking Authority (EBA), a European Securities and Markets Authority (ESMA) and a European Insurance and Occupational Pensions Authority (EIOPA), whose major tasks and powers consist of scrutinizing the consistent application of Community rules by the individual financial institutions and intervening with the affairs of the national supervision authorities in case of the following three situations: 1,if the conducts of the national supervisors are deemed incompatible with the EU law; 2,if irresovable conflicts appear between more than two national supervisors where EU law requires cooperation; and 3, if a member state so requires when an emergency situation exists. The ESFS composed of the above supervisors will start to run as of early 2011 and ensure that the EU, as a whole, can deal with any future financial crisis in a more effective way.

It is revealed by the process from the world financial crisis to the Greek sovereign debt crisis, and then to the European debt crisis that a wide range of potential perils exist within a number of areas in Europe including the institutional framework itself and the economic growth model. As to the institutional architecture of the Euro zone, it is the European Central Bank who in the place of the member states executes an integrated monetary policy, but the fiscal policy is still administered by the member states out of their own free will. This kind of asymmetry between the monetary and fiscal policy weakens the overall capability of the Euro group to deal with the crisis. As to the economic growth model, the European countries immersed in deep debt crisis used to depend heavily on stimulating demand by developing credit to realise economic growth. The breakout of the financial crisis brought an end to this kind of high-speed expansion bubbles and led to a sharp decline of revenues, however, on the other hand, the high cost of welfare had not been commensurately reduced, thus making it desperately hard for the governments to continue supporting its enormous public expenditure, which worsens the default risks they are facing. The crisis also shows that the differentiation in the approaches to realise economic growth and the intensified macro-economic imbalances within the European Economic and Monetary Union have also left budgetary risks. The shortcomings within any one state's economic or fiscal policies may bring about risks for the whole Euro area. Due to the lack of a mechanism to enable national supervisory authorities to make the best decisions within the EU's previous financial supervision system, coordination and information exchange was, to a great extent, inadequate among the national supervisors and different explanations frequently arose as to a same legal issue. The new ESFS, with the newly established European supervisory authorities, will take great efforts to remedy the existing deficiencies and provide effective oversight overthe European integrated financial market, which will rewrite the present regulation and supervision system administered by the member states in their own way, and which will act as the first step to build up the first ever supra-national financial supervision system in the world.

In addition, continuous downgrading of Greece's debt rating during its sovereign debt crisis period, even to junk status, by the international credit rating agencies had sent the already fearful markets tumbling in Europe, resulting in the difficulties for the Greek government to raise funds. At the same time, the rating agencies began to reduce the sovereign debt ratings of Portugal and Spain when the Euro group was prepared to assist Greece, causing panics in the market towards the Euro, heightening and exaggerating the degree of the crisis, complicating the rescue plans of the EU and the IMF, and adding the repayment cost to the governments of those countries caught in the sovereign debt crisis. It forced Europe to reconsider the idea of establishing a separate rating mechanism of its own.

While improving the financial supervision system, in view of the gaps clearly highlighted in the EU's economic governance by the European sovereign debt crisis, the European Council mandated President Van Rompuy to set up a Task Force in March 2010 to deliver a plan for deepening the European economic governance. After discussions at the June and October European Council meetings in 2010, the package on economic governance becomes clearer and is expected to be endorsed at the European Council meeting due to be held in December 2010. The new package principally focuses on the following three points. First, a strengthened Stability and Growth Pact and a stricter fiscal discipline. A range of sanctions and punitive measures will be applied progressively by the EU, including enlarging the spectrum of available measures, introducing sanctions for the euro area member states at an earlier stage and on a progressive basis, and increasing the automaticity in the decision-making in relation with budgetary discipline. In addition, it requires the member states to improve the quality of statistical data and reinforce the implementation of the 'European statistics code of practice'. Second, broadening economic surveillance and deeper and broader policy coordination. The Task Force recommends a new macro-economic surveillance mechanism towards all the EU member states, which will be based on the setting up of a list of indicators, so as to assess annually the macro economic imbalances and vulnerabilities of the member states and address an early warning towards the state concerned. In order to deepen and broaden policy coordination, the EU will conduct an ex-ante assessment when the member states are preparing their budgets, that is, the so-called 'European Semester'. Thirdly, towards a more robust framework for crisis management. The French and German leaders issued a joint statement on October 18 2010 calling for establishing a permanent crisis management mechanism to replace the temporary measures aimed at rescuing Greece and stablising the euro, so as to prevent such events happening again, which has obtained support from all the other member states and consensus was reached as to the guiding principles at the European Council meeting on October 28-29 2010. However, their proposal on a suspension of voting rights in the Council for member states that repeatedly fail to comply with the rules has not been approved. The European Council calls for a 'fast track' approach to be followed to ensure the implementation of the Commission's legislative proposals on economic governance, in order for the Council and the European Parliament to reach agreement by the summer of 2011 and for the member states to finish their respective ratification processes at latest in the summer of 2013.

The European sovereign debt crisis has brought both pressures and opportunities to Europe. It is just because this sovereign debt crisis risked jeopardising the very foundation of the European integration that the Europeans begin to draw lessons from the bitter experience, try to transform the crisis into chances, and are making concrete progresses towards the European economic governance.

Second, the EU is further deepening the European political integration and enhancing its decision-making efficiency while strengthening its democracy.

The Treaty of Lisbon (hereinafter referred to as 'the Lisbon Treaty') came into effect on December 1 2009, symbolising the finalising, after 8 years of turns and twists, of one of the most significant institutional and systematical reforms in the history of European integration.

Although the final entry into force of the Lisbon Treaty has no direct connection with the world financial crisis, it was just against the background of this crisis that the European integration, after the veto of the draft European Constitutional Treaty by the French and Dutch referenda and a 'no' result to the Lisbon Treaty by the first referendum of the Irish people, has achieved a breakthrough. We cannot but believe that the financial crisis has exerted a positive impact on the deepening of the European integration process.

A series of reforming measures have been introduced by the Lisbon Treaty with respect to the EU's institutions. In the first place, it makes adjustments to the EU's structure. It abandons the three-pillar structure of the EU started by the Maastricht Treaty, that is, the European Community, the Common Foreign and Security Policy and the Police and Judicial Cooperation in Criminal matters. Instead, it combines the European Community with the European Union into a single 'European Union', and thus giving up the use of the terminology 'European Community'. Secondly, it launches the institutional reforms, concerning with the European Council, the European Parliament, the Council of the European Union, the High Representative of the Union for Foreign Affairs and Security Policy, the European Commission, and etc. A new mechanism has also been set up, which not only takes due account of the efficiency factor including the establishment and adjustment of EU institutions but of the re-distribution of powers between different institutions. Thirdly, it clearly defines that the functioning of the European Union will be based on representative democracy and on the strengthening of the European Parliament's role. At the same time, it explicitly grants an initiative power to the citizens and intends to strengthen the role of national parliaments in the EU. Fourthly, it enhances the consistency and coherence of the EU's external policies. The EU's role in foreign trade will be obviously elevated and the efficiency and pace of its decision-making with regard to trade policy increased. However, since the European Parliament has gained much greater leverage in the decision-making process in the field of foreign trade, more uncertainties may arise in the future. Except for the improved consistency and coherence in the economic fields such as the common commercial policy and development cooperation and humanitarian assistance, the Lisbon Treaty has incorporated more distinct reforms concerning the EU's external relations.

In fact, the significance of the Lisbon Treaty lies in not only its reformation of the EU's system, what is more important is that it has laid down a new foundation for the European integration in a number of fields. Thanks to the institutional reforms, it has provided new incentives for the EU's development with the help of such 'infrastructure' issues as strengthening democracy, enhancing the decision-making efficiency, balancing the powers between the institutions, and building up a new relationship between the EU and its member states, which will thus exert multi-dimensional influences on the future of Europe.

On the political side, the European Council, consisted of the Heads of States or Government of the Member States, together with its President and the President of the Commission, has become a formal institution of the EU, whose task is to provide the EU with the necessary impetus and define the general political directions and priorities thereof. At the same time, a permanent President of the European Council has thus been set up. In order to simplify the decision-making procedure, the Lisbon Treaty further expands the scope of majority voting. In addition, the double majority voting will become the decision-making procedure most commonly employed within the Council of the European Union. The Lisbon Treaty has also made reforms of the composition and operating system of the Commission, whose President will be nominated by the European Council and elected by the European Parliament, which will strengthen the democratic accountability of the EU. It has also greatly reinforced the major competences of the European Parliament, including the legislative, budgetary and supervisory functions. It also grants the national parliaments the power to be involved in the EU's decision-making process. As to the issue of the citizens' participation, the Lisbon Treaty stipulates that not less than one million citizens who are nationals of a significant number of Member States may take the initiative of inviting the European Commission, within the framework of its powers, to submit any appropriate proposal on matters where citizens consider that legal act of the Union is required for the purpose of implementing the Treaty on European Union and the Treaty on the Functioning of the European Union. Generally speaking, the Lisbon Treaty has, in a certain degree, deepened and broadened the European political integration.

The impacts of the Lisbon Treaty on EU economy are mainly reflected in the incorporation of the 'social market economy' concept into the EU law. In the future, the EU will, while realising social justice, promote a well-ordered market economy under the effective supervision of the states. The essential characteristic of the European model lies in its seeking for a balanced development between economic efficiency and social justice, presenting a sharp contrast with the American model which pursues unlimited economic growth and wealth accumulation. The process from the disparaging and defaming by both Europe and the US of each other's economic models at the beginning of the world financial crisis to the final incorporation of the social market economy into the Lisbon Treaty reveals that the EU has not turned to embrace the American model. The prevalence of the neo-liberalism led by the Americans ever since the 1980s had once led to the social market economy being questioned and criticized, however, the Europeans insist on their own values and believe the American subprime credit crisis proves that they have done the right thing. Instead of wavering the Europeans' confidence, the world financial crisis and the European debt crisis have, on the contrary, strengthened their belief in their values. By incorporating the 'social market economy' into the Lisbon Treaty, the common orientation of the EU member states in the future has been fixed, which will undoubtedly help promote the convergence of their economic models, and which has thus provided important jurisdictional foundations for the deepening of the economic integration.

As matters stand, it has received legal endorsement of the deepening of the European political integration started by the Lisbon Treaty, although time is needed for it to produce practical results. It is revealed by the course from the initial hasty measures taken on their own by the member states individually at the beginning of the world financial crisis, to the strengthened coordination and common actions, until the assistance provided to Greece after the Greek sovereign debt crisis, that it is beyond question the European integration process has already stood the test of the crisis and obtained new impetus from the crisis, for which, the Lisbon Treaty is among the powerful proofs.

The original and most direct momentum driving the EU's reform this time came from the need of the EU to meet the challenges its enlargement brought to it and to its functioning. However, the breakthrough achieved under the context of the world financial crisis and the European sovereign debt crisis reflects the desire of the EU to enhance its ability to respond to the realistic challenges. Seen from the contents of the Lisbon Treaty, this round of the EU's reforms has essentially realised the objectives set by the Laeken Declaration, solved the institutional issue after the EU's enlargement and strengthened the EU's systemic ability to respond to the challenges of the globalisation. In this sense, the Lisbon Treaty has provided a stable framework of institutions and regimes for the EU in the foreseeable future, which will be sure to further the European integration and enhance the EU's discourse power and acting capability in the international community.

Thirdly, the EU is actively expanding its scope at the international arena in the post-crisis era based on the above two points.

At the same time when deepening its economic governance, strengthening financial surveillance and enhancing the degree of political integration, the EU is actively expanding its space for external actions. In fact, among the institutional reforms introduced by the Lisbon Treaty, those in relation to the EU's external affairs attract the most attention with the most intensified reform measures. As stipulated by the Lisbon Treaty, the European Union has succeeded the legal personality of the former European Community, with a competence to conclude international agreements in the area of the common foreign and security policy. At the meantime, the Lisbon Treaty creats the position of a High Representative of the Union for Foreign Affairs and Security Policy (hereinafter referred to as the “HR”), combining the former High Representative for Common Foreign and Security Policy (simultaneously acting as the president of the Foreign Affairs Council) with the European commissioner for external affairs (a member of the European Commission) and stipulates that the HR at the same time sits at the European Commission as one of its vice Presidents, coordinating and conducting the EU's external activities. The HR will assume an important role in the EU's external relations, including the common foreign and security policy and other aspects of the Union's external relations. The promulgation of such provisions and their being rapidly put into implementation illustrates the advancement of the institutionalisation of the EU's external actions.

Another important innovation started by the Lisbon Treaty in the EU's external relations is the setting up of a European External Action Service, whose major function is to assist the HR, comprising officials from relevant departments of the General Secretariat of the Council and of the Commission as well as staff seconded from national diplomatic services of the Member States. It will help the EU to formulate a more effective foreign policy and strengthen the coordination and consistence of its foreign policy.

Effective guarantees have been put in place by the institutional innovations for the EU to further expand its international space. Judged from the most recent external activities of the EU the following conclusions can be drawn. Firstly, the external representativeness of the EU as a whole will be continuously enhanced. Secondly, the degree of policy coordination will be intensified in its foreign relations and the other related policy areas, which will be of help to increase the efficiency of the EU's policy, ensure the effectiveness of its policy implementation and promote its overall capability in external affairs. Thirdly, the EU will continue promoting the integration of its foreign policies, especially the coordination and integration between the common foreign and security policy, common security and defense policy and the development policy.

Meanwhile, as the Lisbon Treaty has concentrated, in a much greater degree, the decision-making power in relation to the common commercial policy in the hands of the EU, the EU has confirmed its exclusive competence as regards the common commercial policy, including tariff and trade agreements relating to the commercial aspects of intellectual property and the measures to protect trade such as those to be taken in the event of dumping or subsidies, it will enable a coordination of the EU countries' foreign trade relations at a higher level, thus reinforcing the EU's status in the world trade. In addition, the Lisbon Treaty provides that foreign direct investment belongs to the field of common commercial policy, one of the EU's exclusive competences, which further expands the EU's competence in foreign economic relations.

In commensurate with the changed balance of international powers after the world financial crisis, the development of the emerging countries and the various kinds of non-traditional security issues in the globalisation process, the EU's foreign policy after the entry into force of the Lisbon Treaty will take on an 'expansive' tendency, which will show itself in the following aspects. Firstly, the EU will actively get involved in the districts with which it has an immediate concern and in the hot spot issues in the world, in particular with regard to its neighbourhood and when so doing, the EU will stress a comprehensive use of all sorts of foreign policy instruments including the military means. Secondly, in concurrent with the above-mentioned position, the EU will more proactively promote the 'value diplomacy', listing the basic values such as human rights, freedom and democracy as its foreign policy goals, and seek to change the existing international rules when they obstruct its pursuing 'value diplomacy'. Thirdly, the EU will actively advance the globalized institutional building, aimed not only at reforming and perfecting the existing multilateral institutional framework, but at creating new international regimes targeting at concrete issues, including the great number of cooperation and coordination at the bilateral level.

In fact, the above tendencies have, to some extent, already become obvious reflected by some of the areas that the EU attaches attention to. As to the issue of boosting the reform of international financial system, the heads of the 27 EU member states held a meeting in Brussels on June 17 2010 and reached a common position on the following 3 points. Firstly, it requires the G-20 member states take efforts to promote the global financial reforms, to reinforce supervision towards the financial institutions and to increase the transparency of their operations. Secondly, it calls on the G-20 member states to implement the exit strategy at an earliest possible time and in a coordinated but differentiated way, and to end their large-scale stimulus programmes carried out during the financial crisis. Thirdly, it asks the G-20 members to introduce systems of levies and taxes on the transactions of the financial institutions. All the above policy recommendations have shown a strengthened coordination of the EU member states developed in the process of dealing with the financial crisis. In addition, in the face of the coming United Nations Climate Change Conference to be held in Cancun in the end of 2010, the EU, after consultation, put forward a new climate change strategy in April 2010. In addition, the EU set up a new Directorate-General for Climate Action in 2010 and will contribute annually 2.4 billion euro for the quick-start fund, which shows that the EU is determined, as a whole, to recapture the leadership role in climate discourse based on internal coordination.

On March 5-6 2010, the foreign affairs ministers of the 27 EU member states and Mrs. Catherine Aston, the HR, met at Cordoba of Spain for an informal meeting, to discuss the EU’s new foreign strategy. It was concluded that in the 21st Century, great changes had taken place in the world situation, with increasing strength of the emerging countries and the deepening of multipolarisation. Under this context, it has become an urgent task for the EU to redefine its global foreign strategy. The representatives agreed at the meeting that the EU should put an emphasis on developing relationships with the emerging political actors while maintaining relations with such major strategic partners as the USA, Russia and China. The EU countries believe that G20 has already taken the place of both G7 and G8 as the major player in solving the present economic and social problems. The traditional club of wealthy nations no longer monoplises the absolute power of discourse because of the rapid rising of the emerging countries who have gained growing powers of discourse, especially Asia as one of the most robust market in the world, which should be given enough attention. It is just against this background that China-Europe relationships begin to return to normal.

In the post-crisis era, a positive posture of the EU has been presented to the world by the range of innovative measures taken not only economically, fiscally and politically in its internal governance but in its relations with the outside. The EU will appear on the world arena with a new look, necessarily bringing enormous impacts on a variety of fields including, in particular, the international financial system reform and world political and economic pattern, which will in turn exert great influences on those important bilateral relations like the China-Europe and Europe-US ones.

However, on the other hand, the practical effects of the Lisbon Treaty still remains to be seen since it has only been a very short time since its entry into force, and a lot of uncertainties still exist as to the internal construction of the EU institutions and the coordination between them under the new system due to the incipient nature of these institutions. In particular, the Lisbon Treaty itself has not solved all the problems with a number of incomplete reforms. The newly established supranational financial supervision system which will start running as of 2011 is still awaiting the test of practice. The diversified interests within the EU will still lead to new contradictions, thus affecting the future of the EU.

At the level of the EU member states, exit of the emergency measures in response to the financial crisis, reinforcement of financial regulation and surveillance and economic governance, implementation of budgetary austerity policy and the reformation of social welfare systems will certainly put pressures on the government of each member state, although in a different degree.

In view of the EU’s external relations, it is beyond doubt that its relationships with the USA will be maintained and developed further, however, the clarification of the different development models and the differences in the ideas concerning international governance have input new connotations into the cooperation and competition between Europe and the US. Having undergone the test of the crisis, the China-Europe relationships began to return to normal, however, due to the more attention paid to the competitive factors by the EU’s policy adjustments, the future of the bilateral relations could not be without setbacks.

Just as we have seen, game playing and twists and turns abound in not only the negotiations on the Lisbon Treaty but those on the financial supervision system and the economic governance programme, however, a key step has already been made towards the EU’s innovations. Multi-dimensional changes will be due to take place in every aspect in Europe, which will produce new influences on the whole world.